Business law essay

1 BUSL377 Japanese Trade Law Week 8: Corporation Law and Corporate Governance (II) Dr Kay-W ah Chan E4A 241 Tel: 9850 7088 Email: [email protected] (2017) 2017 1 Note 1: If there is any discrepancy between: 1. the Textbook; and 2. these slides/lecture notes or what I said in the lecture follow these slides/lecture notes and what I said the lecture. 2017 2 Note 2:  In June 2014, the National Diet has passed/approved amendments of the Companies Act .  These amendments became effective on 1 May 2015.  This unit BUSL377 Japanese Trade Law (S1, 2017) will be based on the Companies Act (as amended accordingly) and therefore includes the amendments passed/approved by the National Diet in June 2014. 2017 3 N.B.  The following slides (until before the “Reference list”) are in respect of Stock/Joint- Stock Companies only. 2017 4 2 Auditors ( Kansayaku ) 監査役 A) Also translated as corporate auditors or company auditors B) Appointed by shareholders’ general meeting (Art.329 para 1) C) Accounting qualifications not needed D) Number: In general, one or more E) Term: four years (Exception: for closed company, can extend to not more than 10 years under articles of incorporation) (Art.336) F) Cannot concurrently be the director, manager or other employee of the company or its subsidiary company or such subsidiary company’s accounting advisor/counsellor or executive officer (Art.335 para 2) G) Must attend directors’ meetings (Art.383 para 1) 2017 5 Auditors ( Kansayaku ) 監査役 H) Subject to J below, with authority on operational and accounting audits:  to audit performance of duties by directors  to audit performance of duties by accounting advisor/counsellor (in companies with accounting advisor/counsellor)  to examine business and financial condition of the company and its subsidiaries (Art.381) I) Removed/dismissed by special resolution at shareholders’ meeting (Art.339 para 1 and Art.309 para 2 (vii)) J) Closed company (excluding companies with Boards of Auditors and companies with Accounting Auditor(s)) can by its articles of incorporation limit the scope of auditors’ authority to accounting audits only (Art.389 para 1) 2017 6 Board of Auditors A) Company that has a Board of Auditors must have three or more auditors (Art.335 para 3) B) Not less than half of such auditors must be outside/external auditors (Art.335 para 3) C) “External auditor” defined in Art.2(xvi) ( note: new definition introduced by the 2014 amendments ): fulfilling all of the 5 conditions below: 1. An auditor who in the 10 years prior to taking up the position as an external auditor of the company has not been a director, accounting counsellor (or where the accounting counsellor is a legal person, member thereof who is to perform its advisory duties), executive officer, manager or other employee of the company or any of its subsidiaries; 2017 7 Board of Auditors C) “External auditor” defined in Art.2(xvi) ( note: new definition introduced by the 2014 amendments ): fulfilling all of the 5 conditions below: 2. If the auditor at any time within the 10 years before taking up the position as an external auditor of the company has been an auditor of the company or its subsidiary company, he/she has not been a director, accounting counsellor (or where the accounting counsellor is a legal person, member thereof who is to perform its advisory duties) , executive officer, manager or other employee of the company or its subsidiary company in the 10 years before taking up the position as the aforesaid auditor of the company; 3. An auditor who (i) is not a “parent company etc.” (when such “parent company etc.” is a natural person) of the company and (ii) is not a director, auditor, executive officer, manager or other employee of a “parent company etc.”; (Note: definition of “parent company etc.” in slide in Week 7) 8 3 Board of Auditors C) “External auditor” defined in Art.2(xvi) ( note: new definition introduced by the 2014 amendments ): fulfilling all of the 5 conditions below: 4.

An auditor who is not an executive/managing director, executive officer, manager or other employee of a “subsidiary company etc.” (excluding the company and its subsidiary companies) of a “parent company etc.” of the company; AND 5.

An auditor who (i) is not the spouse or a relative within the second degree of kinship of a director, manager or other important employee of the company and (ii) is not the spouse or relative within the second degree of kinship of the company’s “parent company etc.” (when such “parent company etc.” is a natural person) (Note: respective definition of “parent company etc.” and “subsidiary company etc.” in slides in Week 7) 9 Accounting Auditors ( Kaikei Kansanin 会計監査人 ) A) Must be certified public accountant or an incorporated accounting/audit firm ( 監査法人 ) (Art.337 para 1) B) Appointed and dismissed by ordinary resolution at shareholders’ meeting (Art.329 para 1 & Art.339 para 1) C) In companies with auditors or board of auditors, the proposal of such appointment/dismissal needs approval from the auditors or board of auditors respectively (Art.344) D) Term: one year (Art.338 para 1) E) Audit financial statements and prepare accounting audit report (Art.396 para 1) F) Liable to third parties for false statements concerning important matters in accounting audit report unless can prove having exercised due care (Art.429(2)(iv)) (more details below) 2017 10 Accounting Advisor/Counsellor ( Kaikei Sanyo 会計参与 ) A) Appointed and dismissed by shareholders’ meeting (Art.329 para 1 & Art.339 para 1) B) Principal duties: to prepare financial statements (balance sheets, profit/loss statements etc.) in cooperation with the Directors or (for companies with nominating committee etc.) Executive Officers and prepare Accounting Counsellor’s report (Art.374(1) and (6)) C) Must be certified public accountant (or an incorporated accounting/audit firm 監査法人 ) or tax attorney ( zerishi ) (or an incorporated tax attorney firm) (Art.333 para 1) excluding:  directors, corporate auditor, executive officer, or employee (including manager) of a stock company or its subsidiary (Art.333 para 3 (i))  a person who is subject to disciplinary action that orders a suspension of operations and the period of such suspension has not yet elapsed (Art.333 para 3 (ii)) 2017 11 Accounting Advisor/Counsellor ( Kaikei Sanyo 会計参与 ) D) Liable to company for neglect to perform duties (Art.423) E) Liable to third parties for intentional act or gross negligence (Art.429) F) Liable to third party for false statements concerning important matters in financial statements or Accounting Counsellor’s report unless the Accounting Counsellor can prove having exercised due care (Art.429(2)(ii)) G) Enhancing confidence in the accuracy of the financial reports, especially for small/medium companies not having Accounting Auditors 2017 12 4 Company with Nominating Committee etc. 指名委員会等設置会社  Company with nominating committee etc. = a stock company that has a Nomination/Nominating Committee, an Audit Committee and a Remuneration/Compensation/Benefit Committee established in accordance with its articles of incorporation  Up to company’s own choice whether to be a company with nominating committee etc.  Each of the three committees must have three or more committee members who must be directors (Art.400 para 1 & 2)  More than one-half of the directors in each Committee must be outside/external directors (Art.400 para 3) (see definition of external director under Art.2(xv) [slides in Week 7]) 2017 13 Company with Nominating Committee etc. 指名委員会等設置会社  Committee members to be appointed & removed by board of directors (Art.400 para 2 & Art.401 para 1)  Generally, directors cannot execute the company’s business (Art.415)  Board of directors to appoint one or more Executive Officer(s) to execute the company’s business (Art.402 paras 1 & 2)  But, director (excluding directors who are members of the audit committee) can concurrently act as executive officer (Art.402 para 6 and Art.400 para 4)  A director of a company with nominating committee etc.

cannot concurrently be an employee (including a manager) of such company (Article 331 para 4) 2017 14 Nomination/nominating Committee  To make proposal to the shareholders’ meeting on the appointment and removal of directors (directors and accounting advisor for company with accounting advisor) (Art.404 para 1) Audit Committee  To audit the performance of duties by directors, executive officers, and (for companies with Accounting Advisor) Accounting Advisor (Art.404 para 2(i))  To prepare audit reports (Art.404 para 2(i))  To make proposal to the shareholders’ meeting on the appointment and removal of accounting auditor (Art.404 para 2(ii))  Directors who are members of the Audit Committee cannot concurrently be:  Executive officers or executive/managing directors ( 業務執行取締 役 ) of the company or its subsidiaries  Accounting advisor/counsellor, manager or other employees of the company’s subsidiaries (Art.400 para 4) 2017 15 Remuneration / Compensation / Benefit Committee  To formulate policies on determination of individual remuneration of directors, executive officers, and (for companies with Accounting Advisor) Accounting Advisor (Art.409 para 1)  To decide on the individual remuneration of directors, executive officers, and (for companies with Accounting Advisor) Accounting Advisor (Art.404 para 3) 2017 16 5 Company with Audit etc. Committee 監査等委員会設置会社  A company with audit etc. committee = a stock company that has an audit etc. committee  Members of the audit etc. committee must be directors of the company (Art.399-2 para 2)  The audit etc. committee must have 3 or more directors and over half of them must be external directors (Art.331 para 6)  The audit etc. committee carries out the following functions:  To audit the performance of duties by directors and (for companies with Accounting Advisor) Accounting Advisor (Art.399-2 para 3(i))  To make proposal to the shareholders’ meeting on the appointment and removal of accounting auditor (Art.399-2 para 3(ii))  To decide on the committee’s opinion for the shareholders’ meeting regarding the appointment and removal of directors who are non-members of the audit etc. committee and such directors’ remuneration (Art.399-2 para 3(iii), Art.342-2 para 4 & Art.361 para 6) 2017 17 Company with Audit etc. Committee 監査等委員会設置会社  A director who is a member of the Audit etc. Committee cannot concurrently be (i) the executive/managing director, manager or other employee of the company or its subsidiary companies; or (ii) the accounting advisor (or the staff performing the duties in the case of the accounting advisor being a juridical person) or executive officer of this company’s subsidiary company (Art.331 para 3) 2017 18 Liability of directors, etc. to the company  Directors, accounting advisor, auditors, executive officers and accounting auditor are liable to the company for loss suffered as a result of neglect of duties (Art.423 para 1) 2017 19 Corporate Governance 1. Internal Control System 2. Internal monitoring/auditing  Auditor(s) / Board of Auditors / Audit Committee / Audit etc. Committee (N.B. may be absent in small/medium closed companies) 3. External monitoring/auditing  Accounting Auditors (N.B. may be absent in small/medium companies, open or closed) 4. Shareholders’ representative actions 5. Derivative actions by shareholders of “Ultimately Wholly Owning Parent Company etc.” 2017 20 6 Shareholders’ representative actions  Legal actions instituted by shareholder(s) on behalf of the company to pursue the liability of directors etc. towards the company  Directors, Auditors, Executive Officers, Accounting Auditors and Accounting Counsellors are subject to shareholders’ representative actions  Who can take this action?  (for closed companies) any shareholder (Art.847 para 2)  (for open companies) any shareholder having held shares continuously for at least 6 consecutive months (or such shorter time as provided in the articles, if any) before the representative action (Art.847 para 1)  But: not apply in cases where the purpose is to seek unlawful gains of such shareholder or a third party or to inflict damages on the company (Art.847 para 1) 2017 21 Shareholders’ representative actions  How? 1. serve a written demand on the company to take legal action to pursue the liability of its director(s) etc. 2. if the company has not taken legal action within 60 days of the demand or if it is likely that the company will suffer irreparable damage on expiry of such 60 days’ period, the shareholder can institute the lawsuit on behalf of the company  When a shareholder make such a demand and the company decides not to sue, the company must notify the shareholder in writing the reasons for such decision 2017 22 Derivative Actions by Shareholders of Ultimately Wholly Owning Parent Company etc. When (on the relevant day) the book value of the company’s stocks held by the “Ultimately Wholly Owning Parent Company etc.” and its “Wholly Owned Subsidiary Company etc.” exceeds 20% (or such smaller portion as provided in the articles, if any) of the total assets of the “Ultimately Wholly Owning Parent Company etc.”, eligible parties can:  demand the company to take legal action to pursue the liability of its director(s) etc.;  can institute lawsuit on behalf of the company if the company has not taken legal action within 60 days of the demand or if it is likely that the company will suffer irreparable damage on expiry of such 60 days’ period The company also has responsibility to give reasons for any decision not to sue (Art.847-3) 23 Derivative Actions by Shareholders of Ultimately Wholly Owning Parent Company etc. But, no such rights in any of the following cases: 1. where the purpose is to seek unlawful gains of such shareholder or a third party or to inflict damages on the company or the “Ultimately W holly Owning Parent Company etc.”; or 2. No damage is caused to the “Ultimately W holly Owning Parent Company etc.” (Art.847-3) 2017 24 7 Derivative Actions by Shareholders of Ultimately Wholly Owning Parent Company etc. Who are the eligible parties? (Art.847-3)  (if the “Ultimately W holly Owning Parent Company etc.” is a closed company) shareholders of an “Ultimately W holly Owning Parent Company etc.” who hold at least 1% (or such smaller portion as provided in the articles, if any) of the shareholders’ voting rights or issued shares (excluding shares held by the Ultimately W holly Owning Parent Company etc.) of this “Ultimately W holly Owning Parent Company etc.” 2017 25 Derivative Actions by Shareholders of Ultimately Wholly Owning Parent Company etc. Who are the eligible parties? (Art.847-3)  (if the “Ultimately W holly Owning Parent Company etc.” is a public company) shareholders of an “Ultimately W holly Owning Parent Company etc.” who hold at least 1% (or such smaller portion as provided in the articles, if any) of the shareholders’ voting rights or issued shares (excluding shares held by the Ultimately W holly Owning Parent Company etc.) of this “Ultimately W holly Owning Parent Company etc.” for at least 6 consecutive months (or such shorter time as provided in the articles, if any) before the derivative action 2017 26 Derivative Actions by Shareholders of Ultimately Wholly Owning Parent Company etc. Definition of “Ultimately Wholly Owning Parent Company etc.”: 1. a wholly owning parent company (Art.847-3 para 2(1)) (N.B. exclusions under (2) & (3) below) ; or 2. (excluding wholly owning parent company) a company which together with its wholly owned subsidiary company etc. (a company whose shares or “equity interests” are solely held by another stock company) holds 100% of the shares in the company concerned (Art.847-3 para 2(2)) (N.B. Art.847-3 para 3 : the company concerned will be treated as a wholly owned subsidiary company etc. of the company under Art.847-3 para 2(2 )) ; or 2017 27 Derivative Actions by Shareholders of Ultimately Wholly Owning Parent Company etc. Definition of “Ultimately Wholly Owning Parent Company etc.”: 3. (excluding wholly owning parent company) a company whose wholly owned subsidiary company etc. holds 100% of the shares in the company concerned (Art.847-3 para 2(2)) (N.B. Art.847-3 para 3 : the company concerned will be treated as a wholly owned subsidiary company etc. of the company under Art.847-3 para 2(2 )) . 2017 28 8 Liability of directors, etc. to third parties  Directors, accounting advisor, auditors, executive officers and accounting auditor are liable to third parties for loss suffered as a result of performance of duties in bad faith or with gross negligence (Art.429 para 1)  BUT, Art.429 para 2 list outs some situations where there is liability unless they can prove no failure in exercising due care, for example:  Relating to directors or executive officers:  False statements concerning important matters in explanatory materials or notification concerning invitation for subscriptions to shares, share warrant, bond, etc.  False statements concerning important matters in financial statements or business reports  Etc.  Relating to accounting advisors:  False statements concerning important matters in financial statements and accounting advisor’s report etc.  Relating to auditors or members of audit committee or audit etc. committee:  False statements concerning important matters in auditing reports  Relating to accounting auditors:  False statements concerning important matters in accounting audit reports 2017 29 Reference list Keiko Hashimoto, Katsuya Natori and John C. Roebuck, ‘Corporations’ in Gerald Paul McAlinn (ed) Japanese Business Law (The Netherlands, Kluwer, 2007). Japan Economic Division, JETRO, ‘Reforms under the new Company Law: Will it be a catalyst for business and industrial revitalization?’ (2005) 17 Japan Economic Monthly 46. ‘Japan Law Digest: Corporations’ in Martindale-Hubbell International Law Digest 2006 , available from LexisNexis. Kawamoto, Ichiro, Kishida, Masao, Morita, Akira, and Kawaguchi, Yasuhiro. Nihon no Kaisha Hô (Company Law of Japan) , Tokyo: Shojihomu 2006. Kodate, Hiroki and Takeuchi, Norifumi. ‘Japan’ International Financial Law Review 2005 Corporate Governance , 51. Oda, Hiroshi. Japanese Law (3 rd Edition) Nakano, Yusuke. ‘ Atarashii jidai no kôporêto gabanansu to konpuraiansu: daiikkai kaishahô niokeru kikansekkei (Corporate governance and compliance in the new era: 1: organisational design under the Company Law)’ (2006) 1 Lexis Kigyouhômu 19. The above slides were (unless otherwise stated) prepared with use of information from the sources listed below: 2017 30 Reference list Takahashi, Eiji and Shimizu, Madoka. ‘The future of Japanese corporate governance: the 2005 reform’ (2005) 10 (19) Journal of Japanese Law (Zeitschrift für Japanisches Recht) 35. Takehara, Takanobu, and Nihei, Takafumi. ‘Corporate governance enters a new era’ The International Financial Law Review Guide to Japan January 2006, 45. Takehara, Takanobu, and Nihei, Takafumi. ‘Japan’ in PLC Cross-Border Corporate Governance and Directors’ Duties Handbook 2007 , pp.97-106. Takehara, Takanobu, and Nihei, Takafumi. ‘Legal flexibility allows for simple structures’ (2007) January Supplement Vol.26, The International Financial Law Review , 57. Yamada, Tsuyoshi, Ota, Yo, and Masuda, Kenichi. Atarashii Bijinesu Hô (New Business Law) , Tokyo: Koubundou 2006. Anderson Mōri & Tomotsune, Introduction to Japanese Business Law & Practice 2nd edition, Tokyo: LexisNexis 2014. Hamabe, Yoichiro. 『 平成26年改正対応 図解新会社法のしくみ 第3版 』 , Tokyo: Toyo Keizai Inc., 2015. The above slides were (unless otherwise stated) prepared with use of information from the sources listed below: 2017 31